HumeLink – a chance to try something different?

HumeLink is the latest in the series of major transmission projects to come out of AEMO’s Integrated System Plan (ISP). It is shaping up to be a set of transmission lines linking Bannaby, Maragle and Wagga Wagga in southern NSW. Its key role is to allow the transfer of energy from Snowy 2.0 to NSW load centres. It will also serve as a backbone for new renewable generation in the area, enabling a Renewable Energy Zone (REZ).

The proponent, TransGrid recently completed the final round of the Regulatory Investment Test, the Project Assessment Conclusions Report, meaning it now falls to the AER to sign off on the project. Once it has the go-ahead, TransGrid will firm up the cost estimates and submit a claim for funding.

The last major project to come under review, EnergyConnect, was dogged by concerns about whether it is justified. The same concerns are now being levelled at HumeLink, especially given its eye-watering price tag is now up to $3.3 bn. At this point in the process, EnergyConnect was costed at $1.5bn. By the time the detailed estimates had been completed, the companies carrying out the project (TransGrid again and ElectraNet) had decided they needed over $2.3bn. A similar increase for HumeLink would see the costs blow out to $5bn.

Concerns over whether TransGrid have properly considered all the best options have led to a formal dispute being lodged with the AER. A broader critique of the project was outlined by Bruce Mountain and Ted Woolley, who have previously collaborated on a take-down of the business case for Snowy 2.0. They argue that the cost-benefit analysis should include the cost of Snowy 2.0, since the transfer of power from Snowy is the key value driver. Even then, the full benefit of Snowy 2.0 will only be realised if another link into Victoria, VNI West, gets built as well.

The Mountain-Woolley critique glosses over the project’s role in enabling new renewable development as well as transporting Snowy 2.0 output. And as they admit, the politics of the project will likely get it over the line one way or another. Both the federal government (who own Snowy Hydro), and the NSW government want to see rapid renewables growth. Therefore both have strong reasons to back the project in. The critics’ conclusion is that the federal government should take on the project as part of the overall Snowy 2.0 project and spare NSW energy consumers the 40 per cent hike in transmission charges they estimate would arise.

This situation creates an opportunity to think outside the box. It comes at a time when the AEMC is reviewing the whole issue of how transmission investment is determined. One of the options likely to come up in that review is the notion of contestable transmission projects. This approach has been successfully used in the UK, Texas and elsewhere to keep transmission costs down.

So, HumeLink could be used as a test case for this kind of approach. We could skip the formalities of AER sign-off on what appears to be a political fait accompli by having the federal government take on the project. This would bring it forward a few months, which would please the project’s supporters. Then it would need to find an appropriately qualified party to finalise the route and tender for the construction. This could be Snowy Hydro itself, which would allow it to be dovetailed with Snowy 2.0 or they could subcontract the job to TransGrid or AEMO, both of whom have experience in procuring construction for transmission projects.

Once built, if the government wanted to get the project off its books, it could tender for someone to own and operate the infrastructure. This is what happens under the UK’s offshore transmission regime for connecting up offshore wind farms to the national grid. Someone still has to pay for it in the long run, but this process would allow for a few years to decide that.

Treating it as a standalone project with its own finance would also keep the project out of TransGrid’s regulatory asset base. TransGrid had concerns about its ability to finance its share of EnergyConnect and unsuccessfully sought a rule change to help it do so. In the end, it secured CEFC financing which helped get it over the line. If EnergyConnect was tough for TransGrid to finance under the existing framework, HumeLink will be twice as hard, given its cost is currently almost twice TransGrid’s share of EnergyConnect.

Lessons learned from these processes can be fed back into the AEMC review, which will likely take some time to conclude. The legal basis for doing things this way has not been examined, but when governments are involved, where there’s a will there’s a way.